Given the events of September 11th, it's easy to understand that the New York City commercial market would face hard times. But now a similar situation is developing on the West Coast, where the economic fall-out from failed dot-coms, floundering telcoms, and flo9undering tech firms are beginning to impact the commercial marketplace.

San Francisco's inflated rents have long been among the highest in the country. Now the Bay Area's commercial real estate market is proving to be among the hardest-hit nationwide. The market includes 220 million square feet of office space spread over about 7,000 square miles, making it one of the largest in the United States.

Office vacancies have soared to 9.4 percent, up nearly 5 percent in the last year, according to Co-Star Realty Information, Inc.

At the same time, office rental rates are down an average of $3 per square foot in the San Francisco area.

CB Richard Ellis puts the number of vacancies even higher. Rates have topped 14 percent in the San Francisco metropolitan area, compared to 2 percent a year ago. The number is even greater -- 17 percent --in the suburbs, where vacancies a year ago also ran about 2 percent. The downtown market is in the best shape, with about 13 percent of office properties vacant, compared to 9 percent a year ago.

Office rental rates are plummeting as well. Just a year ago, at the height of the market, prime office properties regularly went for anywhere from $70 to $100 per square foot. Now, these same properties will fetch just $40 per square foot, if they can even lure new tenants.

Some real estate firms, like Boston Properties, fear that the worst is yet to come. According to Boston Properties' recent filings with the U.S. Securities and Exchange Commission, the company's San Francisco-area vacancy rate nearly tripled in the year ended Sept. 30 -- from 1.5 percent to 4.4 percent. What's more, leases for more than 20 percent of the company's San Francisco office space will expire by the end of 2003.

Prospects look even dimmer for landlords when new space is taken into consideration. Nearly 14 million square feet of newly built office space was added to the market this year, which could create a city-wide vacancy rate of 15 percent.

And as technology firms continue to struggle, the Silicon Valley and San Francisco areas will continue to go without relief. Some experts say vacancies could reach 20 percent to 25 percent before recovery kicks in.

But so far, most landlords are managing to avoid financial hemorrhage. Nearly all properties still are generating positive cash flow, thanks to long-term lease agreements at now-outrageous rental rates.

The Bay Area likely will lose nearly 50,000 jobs this year. Few companies are expanding their workforces, and many technology firms are slashing overhead at every opportunity. The long-term outlook may pick up. But the interim period -- between economic recovery and the expiration of most existing short-term lease agreements -- could be a painful one for landlords.

For more articles by Lesley Hensell, please press here.

Published: December 18, 2001

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net